Turkey Economic: Challenges Accumulate

Turkey Economic: Challenges Accumulate

Summary

Turkish Lira (TL) falls to 2TL to the US$. Turkish Central Bank governor announces TL will be defended by FX sales, not interest rate rises; and predicts Lira recovery. But uncertainty around Fed’s plans; a falling currency; rising interest rates; and the situation in neighbouring Syria. While real economy offers potential to British exporters, macroeconomic environment is troubling.

Detail

Confidence in the Turkish economy has fallen on the back of the US Federal Reserve’s decision to curb quantitative easing and government attacks on business opponents deemed to have supported the Gezi Park protests.

The TL fell below 2 to the US $ on 23 August, at the end of a week in which the Turkish stock market fell 8.5%. The Central Bank (CBRT) raised its overnight lending rate by 50 basis points to 7.75% on 20 August but this did not stop the currency’s slide to 2.03 that week. On 27 August, CBRT governor Erdem Basci said that the Bank would not defend the TL through further interest rate rises. Instead it would sell foreign exchange reserves (currently at $40bn). Basci forecast a recovery to TL1.92 to the US$ by the end of 2013.

Basci’s comments reflect the policies of PM Erdogan and Economy Minister Zafer Caglayan, who have argued consistently that interest rates should be kept low and growth rates high. Caglayan told the press on 27 August that 2.00 TL to the US$ was only a “psychological” barrier. PM Erdogan has blamed the Gezi Park protests on a foreign “interest rate lobby” seeking to drive up interest rates make money from Turkey. He has also criticised wealthy Gulf states for supporting the deposing of Morsi in Egypt.

In June, investigations were launched by the Capital Market Boards into brokers who had allegedly profited from the Gezi Park protests. Ugur Gurses, an economic columnist, said in an interview on 26 August that this “witch hunt” was damaging Turkey’s bid to become a global financial centre and reflected the politicisation of Turkish economic institutions.

Good news includes Turkish statistics showing an 11% rise in UK exports to Turkey in H1 2013 compared with H1 2012, slightly behind Germany (+13%) but ahead of France, Italy and the US (all down by 6-7%).

The comments by Basci are a further indication that CBRT monetary policy is following the policy of the government and PM Erdogan at a time when the government is keen to maintain growth ahead of elections in 2014.

Regional unrest eg in Egypt and fears that regulators and the courts will not act independently also risks discouraging the FDI Turkey needs. This could act, alongside global uncertainty around emerging markets linked to the Fed’s decision to taper QE, to decrease the pool of investors. On 26 August a UAE based company, TAQA, announced that it was postponing a $12bn investment in an energy project in Turkey. Concern that violence could spill over Turkey’s lengthy border with Syria poses an additional element of political risk.

So the economic outlook is less certain than this time last year. How macroeconomic deterioration will affect the real economy remains to be seen: latest official forecasts are for 2013 growth of “below 4%”. Turkey continues to offer real potential to British exporters. But the accumulation of economic challenges, combined with the run up to the 2014 elections, means uncertainty could rise in the months ahead. The imminent Q2 GDP figures will be an important indicator. The 7 September decision on the 2020 Olympics, for which Istanbul is competing with Madrid and Tokyo, could also affect the mood.

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